Sell Smart: Choosing Between A Broker And Investment Banker For Your Optimal Business Exit

When the time comes to transition out of your entrepreneurial role through a business sale, the expertise you enlist to guide you through the complex process can have a profound impact on the outcome. Small and medium enterprise (SME) owners, whose businesses typically generate between $5 million and $50 million in revenue, often find themselves at a crossroads: Should they engage a business broker or an investment banker to steward the sale?

The Mid-Market Sale Landscape

The mid-market serves as the bridge between small companies and large corporations, encompassing a variety of industries and sizes. Selling within this market segment means finding a balance between personalized service and the capability to handle complex, high-stakes transactions.

The Role Of Business Brokers

Business brokers have traditionally catered to smaller, owner-operated businesses, but many have extended their services into the mid-market. They know the local terrain and may have cultivated relationships with area buyers, giving them a unique advantage in finding the right match for your business.

Pros:

• Local Market Knowledge: Their regional focus can be an asset in appealing to buyers who value local insight.
• Personalized Service: They often provide more one-on-one attention, which can be comforting and tailored to your specific needs.
• Lower Fees: Brokers usually charge a lower commission, which can be financially beneficial, especially on the lower end of the mid-market scale.

Cons:

• Limited Reach: Brokers might not have the same national or international buyer network as investment bankers.
• Handling Complexity: For sales on the larger end or those with intricate details, brokers might be outmatched by the resources of an investment bank.
• Marketing Scale: The level and reach of marketing that brokers can offer are typically smaller in scope compared to investment banks.

The Expertise Of Investment Bankers

Investment bankers excel in dealing with more substantial, complex transactions. They bring a global network and a strategic perspective to the table, which can be pivotal for businesses on the higher end of the mid-market or with specific transactional complexities, especially if your business is to be marketed to private equity firms.

Pros:

• Extensive Networks: Their connections span nationally and internationally, which can be crucial in finding premium buyers.
• Complex Deal Structuring: They are adept at managing intricate sales and can often secure better terms and higher sales prices.
• Strategic Positioning: Investment bankers are skilled at positioning your company to enhance its value and appeal to serious buyers.

Cons:

• Higher Costs: Their services come at a premium, with fee structures that may include retainers, success fees, and other costs.
• Prioritization of Larger Deals: There is a risk of being a lower priority if your business is on the lower end of their typical deal size.
• Less Personal: The relationship might feel more transactional and less personal compared to working with a broker.

Fee Structures

The commission for a business broker can range from 8% to 12% for smaller deals but may be much lower for businesses of greater value. Investment bankers, conversely, have more complex fee structures. They may require a retainer, charge a lower percentage of the sale price, and sometimes include a performance incentive that aligns their interests with achieving the highest sale price possible.? Generally, the fee charged by the business broker will be a higher percentage of proceeds because of the relatively small transaction size.

Integrating Industry Insights

Let’s bring forth insights from both camps. A seasoned business broker emphasized the importance of understanding a seller’s individual goals, not just the financials, to align the sales strategy with the client’s personal vision. An investment banker highlighted their role in navigating complex regulatory landscapes and structuring deals to attract strategic buyers that can afford premium prices.

The Broker/Banker Dichotomy

Consider the tale of two sales: An owner of a $6 million custom manufacturing business partnered with a local broker, leveraging the broker’s deep community ties to find a buyer passionate about maintaining the company’s local legacy. Contrast this with a technology firm at the $45 million revenue mark, which engaged an investment banker, ultimately selling to an international conglomerate at a premium valuation, a move orchestrated through the banker’s expansive network.

The sale process, regardless of the advisor you choose, will move through valuation, marketing, negotiation, due diligence, and closing. A broker’s approach may be more hands-on throughout these stages, providing comfort in the familiar, while an investment banker’s strategy will likely be rooted in financial optimization and broader market dynamics.

The decision between a business broker and an investment banker is not simply a matter of size or cost—it’s a choice that reflects your business’s complexity, your personal goals, and the nature of the transition you envision. By understanding the nuances of each advisor’s strengths and aligning them with your sale objectives, you position yourself not just for a successful transaction, but for the fulfilling closure of one chapter and the exciting beginning of another.

Source: https://valueaccelerationpartner.com/article/sell-smart-choosing-between-a-broker-and-investment-banker-for-your-optimal-business-exit/